BlackRock (BLK) — the world’s largest asset manager — delivered better-than-expected quarterly earnings and revenue, but it’s unclear if the upside surprise will be enough to pull BLK stock out of the red for the year-to-date.
After all, BLK suffered its first quarter of net outflows for the first time in almost three years, as investors pulled more than $7 billion out of BLK products. Furthermore, costs rose sharply.
That said, BLK did manage to put together a quarter of solid growth even as big institutional clients moved to cash because of the Greek debt crisis, the market crash in China and other unsettling developments.
The key was BLK’s combination of both active and passive investments. Passive products are generally the superior choice for investors, but no so much for asset managers like BLK, because of their low fees.
Indeed, inflows to more expensive active funds are what allowed BLK to enjoy better-than-expected second-quarter results. As CEO Larry Fink said in a statement:
“Despite the impact of more than $30 billion of low-fee institutional index outflows, net inflows into higher-fee active and iShares products drove robust organic base fee growth for the quarter.”
For example, U.S. active mutual funds experienced net inflows of $7 billion. Internationally, BLK said it had net inflows of more than $3 billion.
BLK Tops Forecasts
It all added up to a Street-beating quarter. BlackRock earnings came to $819 million, or $4.84 per share, up from $808 million, or $4.72 per share, in last year’s quarter.
On an adjusted basis — which is what the market cares about — earnings were $4.96 per share. That easily eclipsed analysts’ average estimate of $4.80, according to a survey by Thomson Reuters.
But there are legitimate reasons that BLK stock was down 4% before the solid earnings news boosted it. Analysts at Zacks Equity Research — which calls BLK stock a “hold” — are leery of BLK’s weak expense control, high dependence on fee-based revenue and regulatory restrictions on its revenue sources.
Expense control was indeed ugly in the most recent quarter. At a time when most companies need to cut costs in order to grow the bottom line, BLK reported an 7% rise in total expenses.
Market sentiment has also been set against BLK stock because the Federal Reserve’s first interest-rate hike is not far on the horizon. When interest rates rise, bond prices fall, and that has some observers concerned about what will happen to BLK’s fixed-income business when the Fed finally presses the button.
Click to EnlargeLastly, BLK is on the cusp of carving out a death cross, which is a sell signal for chart watchers. See the embedded chart, courtesy of Yahoo Finance, which shows the 50-day moving average about to plunge through the 200-day moving average.
The issue here is that even if you think technical analysis is voodoo, there’s a risk that a death cross could become a self-fulfilling prophecy.
The market’s strong positive reaction to the upside surprise should allow BLK to avoid hitting a death cross, but fundamental concerns about cost controls and interest-rate risk will remain.
There’s nothing compelling enough in the BLK investment thesis to justify deploying new money into the name at current levels.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
